For insights into a company’s ESG risk assessment, look to its geographic footprint. In BDO’s 2024 CFO Outlook Survey, which polled over 600 finance leaders, 40% of globally operating U.S. companies consider managing ESG risks to be their primary objective in undertaking sustainability initiatives. Meanwhile, domestic businesses are most focused on leveraging ESG to improve brand reputation (34%) and attract and retain talent (33%). This divergence in priorities indicates that globally operating U.S. companies perceive ESG risks as more material than businesses solely operating in the U.S.

Driving these differences are increasing regulatory requirements, differing stakeholder demands, and distinct customer expectations.

Sustainability Requirements in the EU Carry Major Influence

BDO’s CFO Outlook Survey revealed that U.S. companies with global reach — specifically those operating in the European Union — assess the materiality and opportunities associated with sustainability more proactively than their U.S. counterparts. European Union requirements play a central role in this trend. Effective for many organizations starting in 2024, the EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies in scope to report material information on their sustainability-related impacts, risks, and opportunities. By 2028, more than 50,000 companies will be subject to CSRD reporting in accordance with the European Sustainability Reporting Standards (ESRS).

Although the U.S. is starting to introduce climate-related legislation, such as the SEC’s climate risk disclosure rule and California’s Climate Corporate Data Accountability Act, many domestic U.S. companies are still trailing behind their global peers in managing ESG risks. This lag can be partially attributed to a lack of consensus among U.S. states on the consideration of ESG in investment decisions. While California is enacting broad climate legislation, other U.S. states are taking an opposing stance on ESG issues. More than two-thirds of U.S. state legislators considered legislation forbidding ESG risk assessment in investment strategies in 2023; however, few to date have passed.

It is also important to understand that the European Union’s CSRD may impact domestic companies that intersect with the supply chains of companies directly in scope. Mindful of this component, globally operating U.S. businesses are more likely to be compelled by various stakeholder groups to consider the impacts of regulation on their suppliers, vendors, and distributors. This consideration reflects a broader shift toward holistic analysis of climate risk, emissions, and other externalities across the full value chain.

As a result, noncompliance penalties and reputational damage have led globally operated businesses to refine and invest more resources in their ESG risk management strategies. As such, it’s unsurprising that many finance leaders with global oversight roles see a stronger link between their operating strategies and their social and governance initiatives. Some of these initiatives include enforcing internal policies to improve workplace transparency, stewardship of their communities, and diversifying their senior leadership teams.

International Customer and Stakeholder Demands for ESG Initiatives Exceed Those in the U.S.

Growing stakeholder demands for ESG initiatives compound the risks of noncompliance, particularly for U.S. businesses with an international footprint. The EU’s Sustainable Finance Disclosure Regulation (SFDR) seeks to ensure consistent sustainability reporting from financial market participants and advisers, such as investment managers. It aims to inform investment decision-making to limit greenwashing through standardized ESG disclosures. The SFDR went into effect in 2021 on a phased basis and is currently being assessed by the European Commission for potential updates.

Frameworks such as SFDR have influenced global investors to dial deeper into climate and social risks as part of their investment strategies. Globally operating U.S. businesses, as a result, are prioritizing ESG issues to appeal to a broader investor market. Nearly all of the $57 billion in cumulative inflows that went to sustainable funds in the first half of 2023 were in Europe.

Beyond satisfying customer and stakeholder demands, globally operating U.S. businesses also face an increasingly demanding consumer cohort, with consumers across 17 international markets reporting that ESG issues are a significant driver of their purchasing decisions. Meanwhile, U.S. consumers were reported as least likely to consider environmental factors as important to their purchasing decisions — another divergence in sentiment between U.S. and international markets.

Mounting pressure from investors, customers, and other stakeholders amplifies the materiality of ESG risks, necessitating globally operating U.S. companies to develop more mature ESG risk management strategies. If global businesses are not proactive in managing ESG risks, they may face regulatory, financial, and reputational damages from inaction. 

A company’s geographical footprint has a considerable effect on its ESG risk assessment maturity, with globally operating U.S. companies pacing ahead of their domestic peers. However, new and forthcoming ESG reporting requirements from U.S. regulators will precipitate more rigorous management of sustainability risks by domestic organizations. Beyond adhering to domestic reporting requirements, those U.S.-only companies will need to keep pace with their global counterparts to attract more investors and appeal to broader and untapped markets. That race for transparency bodes well for business, investors, people, and the planet.

ABOUT THE AUTHOR

Karen Baum

Karen Baum is managing principal of sustainability and ESG at BDO.

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